Japan's Amari confident Sakhalin-2 LNG deals to be honored

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Published: Dec 21, 2006 11:54 p.m. ET

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TOKYO (MarketWatch) -- Japan's Minister of Economy, Trade and Industry Akira Amari said Friday that he is confident the stakeholders of Sakhalin-2 will honor their promise to supply liquefied natural gas to Japan from the oil and natural gas project.

"I have heard they confirmed that they will honor the LNG contract (with Japanese buyers). I recognize this," Amari said.

On Thursday, Russian state-owned energy company OAO Gazprom (GSPBEX.RS), Anglo-Dutch oil major Royal Dutch Shell PLC (RDSA), Japanese trading house Mitsui & Co. (8031.TO) and Mitsubishi Corp. (8058.TO) signed a deal in Moscow allowing Gazprom to buy 50% plus one share in the massive Sakhalin-2 oil and gas project for $7.45 billion in cash.

The announcement follows months of investigating by the Russian environmental regulator - a move perceived by analysts as a way to support a Gazprom takeover of the project.

To accommodate Gazprom's purchase of a controlling share, the current partners in the project each will dilute their stakes by 50%. Shell will retain a 27.5% stake, reduced from its previous 55% holding; Mitsui will hold 12.5%, reduced from 25%; and Mitsubishi will hold 10%, reduced from 20%.

Following the announcement, Royal Dutch Shell's Chief Executive Jeroen van der Veer said Sakhalin-2's clients - including Tokyo Electric Power Co. (9501.TO) and Tokyo Gas Co. (9531.TO)- will receive the full volumes contracted at the original price negotiated.

Amari indicated he isn't overly concerned about the possibility of the Russian side reneging on its LNG supply commitments.

"The both sides (Gazprom and Shell) need to help each other. So I think the situation will become stable from now."

Tokyo Electric Power is to get 1.5 million tons a year of LNG from Sakhalin-2 for 22 years, while Tokyo Gas is to be supplied with 1.1 million tons annually for 24 years, according to the Web sites of the two companies.

A Tokyo Electric spokesman said the company has been informed by project operator Sakhalin Energy that "the problems have been settled."

Japan's largest power utility "expects the LNG to be delivered as scheduled," he said.

Sakhalin-2 has been bogged down by difficulties including risks of new delays, problems obtaining budget approval and investigations by Russian environmental authorities.

LNG deliveries from Sakhalin-2 are due to start in the summer of 2008, according to Shell's latest update on the project timing, posted to its Web site last year.

The Ministry of Industry and Energy, however, was Thursday quoted by Russian news agency Prime-Tass as saying it expects the project's gas exports to begin in 2009.

Sakhalin-2 holds an estimated 17.3 trillion cubic feet of natural gas and 1 billion barrels of oil. It is expected to produce 9.6 million tons a year of LNG at its peak.

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